Financial inclusion and energy poverty: Empirical evidence from a household survey in Pakistan

Energy poverty represents an important dimension of household welfare, particularly in developing economies where energy expenditures can constrain the resources available for other essential needs. This study examines the relationship between financial inclusion and after-fuel-cost energy poverty (AFCP) in Pakistan using nationally representative HIES 2018–19 household-level data. The study measures energy poverty through the after-fuel-cost approach and develops a composite financial inclusion index using a two-stage Principal Component Analysis. Given the binary nature of AFCP and the potential endogeneity of financial inclusion, the empirical analysis employs OLS, Probit, 2SLS, and IV-Probit models. The results indicate considerable variation in AFCP across Pakistan, with the incidence differing between rural and urban households and across provinces. The empirical findings consistently show a negative association between financial inclusion and AFCP, while the relationship becomes considerably stronger after accounting for endogeneity through instrumental-variable estimation. The findings suggest that access to formal financial services can strengthen households’ economic capacity to manage energy expenditures and reduce vulnerability to energy affordability constraints.